MCQ 2 — SA 540 The auditor prefers ₹96 crore.

MCQ 2 — SA 540

The auditor prefers ₹96 crore. Management records ₹100 crore. Who is actually right?

Vega Ltd. has recognised a provision for product warranty obligations.

Management’s estimate is:

₹100 crore

Based on the evidence available, the auditor develops a reasonable range of:

₹94 crore – ₹102 crore

The auditor’s preferred point estimate is ₹96 crore.

During the audit, the auditor observes that management has deliberately selected ₹100 crore because it considers recent product complaints to indicate that warranty claims could be higher than the historical average.

The auditor cannot identify evidence showing that ₹100 crore is outside a reasonable outcome.

The audit senior concludes:

“Management’s estimate should be reduced to ₹96 crore because the auditor’s best estimate is ₹96 crore.”

Management disagrees.

Which ONE of the following is correct?

A. Management is correct.

B. The auditor’s conclusion is appropriate because, once the auditor has developed a point estimate that is more precise than management’s estimate, the auditor’s amount becomes the benchmark against which management’s accounting estimate must be measured, particularly where the auditor has used more recent information in developing that estimate.

C. Management’s estimate can be accepted only if management demonstrates that ₹100 crore is statistically more probable than every other amount within the auditor’s range; merely establishing that the amount is within the range is insufficient because management’s point estimate must represent the single most likely outcome.

D. The auditor’s conclusion would be correct if ₹96 crore were the midpoint of the range, because SA 540 requires management to select an amount closest to the auditor’s central estimate whenever the auditor’s range contains more than one reasonable outcome.